Quillon Software, an Indian SaaS company, has revenue of Rs 800 crore growing 25% a year and an EBITDA margin of 18% that management says reaches 28% by year three. It trades at 6x EV/sales (EV Rs 4,800 crore) against peers at 5x. Pitch it: what do year-three EBITDA and a 25x exit multiple imply for the return, and what has to go right?

On the plan, EBITDA triples to about Rs 438 crore and a 25x exit values Quillon at about Rs 10,938 crore, 2.28x today's price, roughly 32% a year. That happens even though the EBITDA multiple falls from 33x to 25x, because the margin rising from 18% to 28% adds more value than anything else. If the margin stays at 18%, the return falls to 1.46x. The pitch is a bet on the margin.

Compound the revenue: 800 x 1.25 x 1.25 x 1.25 = Rs 1,562.5 crore. At a 28% margin, EBITDA is Rs 437.5 crore, three times today's Rs 144 crore, and at 25x the business is worth Rs 10,938 crore. With no debt and no new shares, that is 2.28x the Rs 4,800 crore paid, an IRRThe yearly rate of return that turns the money paid today into the value received later. of about 32%. Notice the entry multiple: Rs 4,800 crore on Rs 144 crore of EBITDA is 33.3x, so a 25x exit assumes the multiple falls by a quarter.

A tea stall that doubles its customers and also learns to buy milk more cheaply earns more for two reasons, and a buyer should know which one he is paying for. Split the value change into three engines: revenue growth at today's margin and multiple adds Rs 4,575 crore, the margin rising from 18% to 28% adds Rs 5,208 crore, and the multiple falling from 33.3x to 25x takes away Rs 3,646 crore. The margin is the largest single engine. That is the finding the pitch has to defend.

Run each assumption on its own. If growth slows to 18% a year the return is still about 1.92x, and at a 20x exit about 1.82x; if the margin stays at 18%, the return falls to 1.46x, about 14% a year. The pitch needs the margin more than anything else. The margin needs sales and marketing costs to grow much more slowly than revenue, customers to renew without heavy discounts, and share-based pay to stay modest; watch for EBITDA that excludes growing employee stock costs, because that margin is not real. Quillon breaks even, 1.0x, only if the year-three margin is as low as 12% at a 25x exit, so the downside on the plan is limited unless the multiple falls much further.

Lead with the view and the variant perception. The market is paying 6x sales, a premium to peers, but at 33x EBITDA it is not paying for the margin plan; if the margin arrives, the stock can compound even as the multiple falls. Name the evidence that would show it arriving: sales and marketing as a share of revenue falling each quarter, net revenue retention holding, and the margin rising without a jump in capitalised costs. Name the exit too: two quarters in which the margin fails to rise while growth also slows would break the thesis. Size it as a position that can lose a third if the margin case fails and the multiple compresses together, not as a sure compounder.